The US burns…
There are lootings, shootings, and protests all over the country.
The president cowers in his bunker.
The National Guard is out on the streets.
And the stock market moves up?!
Yeah, it sounds crazy, I know.
But that’s what’s happening.
US stock markets edged up 0.36% overnight. And they’re almost back at pre-coronavirus highs.
Most people I speak to say ‘Ryan, it can’t last. The market has to fall.’
But guess what?
History suggests it can.
That the stock market can keep going up massively in such times.
Of course, there are costs to pay too. Social and political unrest usually ramps up.
But when it comes to markets, further gains are very much on the cards.
Let me explain how…
The money printing won’t stop
As we just found out in the recent coronavirus crisis (remember that!?), central banks and the Fed are a one-trick pony.
Their solution to any problem — from financial crises to global pandemics — is simple.
Print more money…
This isn’t a new idea.
Germany tried this in the Weimar Republic of the 1920s. As their economy tanked, they simply printed more money.
With terrible consequences.
From history.com:
‘According to Paper Money, written by George J. W. Goodman under the pseudonym Adam Smith, “the law-abiding country crumbled into petty thievery.” An underground bartering economy was established to help people meet their basic needs.’
But what happened to the German stock market?
Check out this chart:
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| Source: JP Morgan |
The black line shows the value of the German stock market in German marks, the blue dotted line in US dollars. The scale on the left-hand side is exponential.
As you can see, in the local currency the stock market kept going up through this turbulent time.
At the same time the German mark was depreciating rapidly against other world currencies, mind you.
And you can see priced in US dollars, the German market dipped severely in 1922, but after that it staged a stunning rise, even in USD.
Interesting, don’t you think…?
Or how about a more recent example.
You wouldn’t think it, but the Venezuelan stock market has been on the rise over the last decade:
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| Source: Trading Economics |
Of course, the value of the local currency in this case tanked too.
So, whether this represents wealth creation or just ‘less slow’ wealth destruction, is another issue to consider.
But my point here is that markets can go up in their local currency, even when the economy, even when society, looks shot to pieces.
And it’s all to do with the power to print fiat money at will.
Now look at this
As the powers that be print out money, they direct it to their cronies.
For example, for every $1,200 stimulus cheque the Fed gave to ordinary US citizens, they gave Wall Street $16,800!
This is the corruption of the fiat system of money at work.
But even the cronies now have a problem. They must park this new cash somewhere.
With bank rates close to zero, the stock market becomes attractive even at very high valuations.
So, this new money ends up in the stock market, causing it to rise even further.
But don’t mistake that for real wealth creation…
My colleague Greg Canavan posted this chart on Twitter earlier today:
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| Source: Optima |
It shows the value of the S&P 500 as priced in gold — an independent form of money.
Now, isn’t that interesting?
It shows you that priced in gold, overall the stock market has been falling since 2000. And in recent months looks like breaking the medium-term uptrend since 2012.
When you see this, you realise that any asset priced in fiat is an illusion of wealth. The money printers distort the true value of assets.
The problem is most people are blind to this and live in a fiat world. So, in the game of competitive human interests, they think the goal is to earn more fiat.
But those with their eyes open realise the fiat game is rigged and we’re using the wrong measure of wealth.
What you can do
I’m no gold bug.
But I can see its value in the kind of world we’re living in.
My preferred option to store wealth outside the existing system is cryptocurrencies.
I think they’re the only asset class in the world right now free from financial market corruption.
But whether you like gold, bitcoin, property, or shares, the fact is if the money printing continues, all these assets will go up in fiat terms.
So as tempting as it can be right now to sit in cash waiting for this to all ‘blow over’ — which it won’t — in my opinion, sitting in cash is probably the riskiest strategy of them all.
As Ray Dalio said recently, ‘cash is trash.’
In terms of putting money in the stock market, my strategy is to look for outlier stocks. Those are unique companies riding waves of innovation.
Because what is different these days, is that the pace of technological change has never been faster.
There’ll be deep societal changes that come out of 2020.
And in my opinion, technology will drive these changes as people seek out different lifestyles and ways of living.
As an investor, that’s where the real wealth creation opportunities lie.
Good investing,
Ryan Dinse,
Editor, Money Morning
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